In choosing the level of quality to purchase, the buyer of a differentiated product also chooses a point on the marginal price schedule for that product. Hence, in general, the demand functions for product characteristics cannot be consistently estimated by ordinary least squares. Market equilibrium results in a matching of characteristics of demanders and suppliers. This matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics. The paper develops these issues. A stochastic structure for hedonic equilibrium models is then proposed, identification results are presented, and estimation procedures are outlined.

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Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products

This study examines how errors in measuring marginal attribute pric es vary with the form of the hedonic price function. In simulations, consumers with known utility functions bid for houses with given attributes. Various forms of the hedonic function are estimated using equilibrium housing prices. Errors in estimating marginal attribute prices are calculated by comparing each consumer's equilibrium marginal bid vector with the gradient of the hedonic function. When all attributes are observed, linear and quadratic Box-Cox forms produce lowest mean percentage errors; however, when some attributes are unobserved or are replaced by proxies, linear and linear Box-Cox functions perform best. Copyright 1988 by MIT Press.

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On the Choice of Funtional Form for Hedonic Price Functions

Non-market valuation has become a broadly accepted and widely practiced means of measuring the economic values of the environment and natural resources. In this book, the authors provide a guide to the statistical and econometric practices that economists employ in estimating non-market values.

Valuing Environmental and Natural Resources

We exploit the structure of the Clean Air Act to provide new evidence on the capitalization of total suspended particulates (TSPs) air pollution into housing values. This legislation imposes strict regulations on polluters in “nonattainment” counties, which are defined by concentrations of TSPs that exceed a federally set ceiling. TSPs nonattainment status is associated with large reductions in TSPs pollution and increases in county-level housing prices. When nonattainment status is used as an instrumental variable for TSPs, we find that the elasticity of housing values with respect to particulates concentrations ranges from 0.20 to 0.35. These estimates of the average marginal willingness to pay for clean air are robust to quasi-experimental regression discontinuity and matching specification tests. Further, they are far less sensitive to model specification than cross-sectional and fixed-effects estimates, which occasionally have the “perverse” sign. We also find modest evidence that the marginal benefit of reductions of TSPs is lower in communities with relatively high pollution levels,

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Does Air Quality Matter? Evidence from the Housing Market

Research on the Elderly: Economic Status, Retirement, and Consumption and Saving

Choice of functional form for hedonic price equations

This paper compares housing price indices estimated using three models with several sets of property transaction data The commonly used hedonic price model suffers from potential specification bias and inefficiency, while the weighted repeat-sales model presents potentially more serious bias and inefficiency problems A hybrid model combining hedonic and repeat-sales equations avoids most of these sources of bias and inefficiency This paper evaluates the performance of each type of model using a particularly rich local housing market database The results, though ambiguous, appear to confirm the problems with the repeat sales model but suggest that systematic differences between repeat-transacting and single-transacting properties lead to bias in the hedonic and hybrid models as well

On Choosing Among House Price Index Methodologies

SHORELINE development is a growing public policy issue in many urban areas. While there is some published research on a related topic, the importance of ambient water quality, economists have not yet turned their attention to the economic significance of the existence and width of the undeveloped apron offering public use and access to bodies of water in urban areas. There are several important issues to be considered here. May we expect the urban land market to provide a solution which is Pareto efficient? Have public agencies through zoning and other building restrictions acted in a socially optimal way? What contribution can studies of the determinants of property values make to our understanding of these issues? We begin an exploration of these issues and present some empirical results that enhance our knowledge of the economics of water-related open space. More generally. this paper extends recent economic work that has produced quantitative measures of value for phenomena hitherto restricted to qualitative expression. The process of transforming qualitative into quantitative knowledge, so essential to an empirical science as to be one of its distinguishing features, is well illustrated by the work of Cobb and Douglas on production (1928); Griliches (1961) on the qualitative characteristics of automobiles; and Fogel and Engerinan's (1974) controversial piece on slavery.' With respect to hotusing, implicit prices of each attribute contained in the bundle of housing services have been estimated by hedonic price regressions in the spirit of the work by Lancaster (1971) and others.2 In the following sections we first examine the choice of housing attributes, including waterrelated open space and proximity to bodies of water, faced by a household in a metropolitan area. Next, the process of implicit price formation is examined, and, employing data on individual dwelling units in a metropolitan area with numerous bodies of water, these implicit prices are estimated. We then turn to the question of what can and cannot be inferred from these results about the demand for open space and the welfare gains or losses resulting from possible changes in the amount of water-related open space.

Economic Valuation of Shoreline

This article presents a methodology for producing a quarterly transactions-based index (TBI) of property-level investment performance for U.S. institutional real estate. Indices are presented for investment periodic total returns and capital appreciation (or price-changes) for the major property types included in the NCREIF Property Index. These indices are based on transaction prices to avoid appraisal-based sources of index “smoothing” and lagging bias. In addition to producing variable-liquidity indices, this approach employs the Fisher-Gatzlaff-Geltner-Haurin (Real Estate Econ., 31: 269–303, 2003) methodology to produce separate indices tracking movements on the demand and supply sides of the investment market, including a “constant-liquidity” (demand side) index. Extensions of Bayesian noise filtering techniques developed by Gatzlaff and Geltner (Real Estate Finance, 15: 7–22, 1998) and Geltner and Goetzmann (J. Real Estate Finance Econ., 21: 5–21, 2000) are employed to allow development of quarterly frequency, market segment specific indices. The hedonic price model used in the indices is based on an extension of the Clapp and Giacotto (J. Am. Stat. Assoc., 87: 300–306, 1992) “assessed value method,” using a NCREIF-reported recent appraised value of each transacting property as the composite “hedonic” variable, thus allowing time-dummy coefficients to represent the difference each period between the (lagged) appraisals and the transaction prices. The index could also be used to produce a mass appraisal of the NCREIF property database each quarter, a byproduct of which would be the ability to provide transactions price based “automated valuation model” estimates of property value for each NCREIF property each quarter. Detailed results are available at http://web.mit.edu/cre/research/credl/tbi.html.

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Henry O. Pollakowski

Papers

Choice of functional form for hedonic price equations

On Choosing Among House Price Index Methodologies

Economic Valuation of Shoreline

A Quarterly Transactions-based Index of Institutional Real Estate Investment Performance and Movements in Supply and Demand

The Effects of Land-Use Constraints on Housing Prices